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Political Economy of Market Reforms (Carol Graham)

The Johns Hopkins University

Department of Economics

Fall 2001

Carol Graham

Wednesdays, 2-4 p.m.

Enrollment: App.20 students


This course is a seminar on the political economy of market reforms, with a particular emphasis on issues of poverty and inequality, and with a focus on Latin America in a comparative context. A question of major debate for policymakers is whether the turn to the market has exacerbated the region’s traditionally high levels of inequality, or positioned the region for more equitable and sustainable growth over the long-term. Such questions are a concern beyond the region and in most emerging market countries, as it is increasingly clear that even sound economies are vulnerable to exogenous shocks and contagion effects that can have profound negative effects on welfare and distribution. The course explores the politics and economics of income distribution and how they interact with the market reform process. A particular emphasis will be placed on the institutional reforms that are a necessary complement to sustainable market growth in a market economy, institutions that range from safety nets and social service providers to financial and regulatory institutions. It will also introduce two less well known pieces of the inequality puzzle. The first of these is mobility, i.e. movements up and down the income ladder, and the effects of market reforms on mobility in the emerging market countries. The second and related theme is subjective or perceived well being. The course introduces the burgeoning economics literature on subjective well being, and explores the effects of increases in both opportunities and vulnerabilities related to the market reform process on the perceived well being of publics in emerging market economies.

Requirements: The course will meet once a week, and students should come to class with the readings complete and prepared to participate. Participation will be a significant consideration in the compilation of final grades. Students will also participate in a class-wide debate, and prepare a final paper (10 pages) and presentation (10 minutes) for the final class session, choosing from topics to be assigned and based on the class readings. The course grade will be based on the paper and presentation, on a midterm examination, and on participation. Students should come to the first session prepared to discuss the readings for that session.

Session # 1.

September 12

Growth, Poverty, and Inequality

Discussion questions: Are inequality and growth positively or negatively related? How are poverty and inequality related? Do market reforms increase poverty and inequality? Do politics play a role?

Alesina and Rodrik. 1994. ?Distributive Politics and Economic Growth. Quarterly Journal of Economics 109: 465-490.

Kuznets. 1955. ?Economic Growth and Income Inequality.? American Economic Review 45 (March): 1-28.

Persson and Tabellini. 1994. ?Is Inequality Harmful for Growth?? American Economic Review 84: 600-621.

Birdsall and Londoño. 1997(May). ?Asset Inequality Matters: An Assessment of the World Bank?s Approach to Poverty Reduction.? AEA Papers and Proceedings.

Williamson, “In Search of a Manual for Technopols”, in John Williamson, eds., The Political Economy of Reform (Washington, D.C.: Institute for International Economics, 1994).


Session # 2.

September 19

Institutions, the State, and Growth with Equity

Discussion questions: What is the role of the state in sustaining the process of market reforms? In enhancing equity? What is the role of institutional change in the shift between first and second stage reforms? What are the challenges involved in reforming state institutions?

Birdsall, Graham, and Sabot. 1998. ?Virtuous Circles in Latin America?s Second Stage of Reform. In Birdsall, Graham, and Sabot, (eds.), Beyond Trade-offs : Market Reforms and Equitable Growth in Latin America. Washington, D.C.: The Brookings Institution.

Graham and Naim. 1998. ?The Political Economy of Institutional Reform in Latin America.? In Birdsall, Graham and Sabot (eds.), Beyond Tradeoffs: Efficient and Equitable Growth in Latin America. Washington, DC: Brookings Institution and Inter-American Development Bank.

Grindle. 1998. Getting Good Government: Capacity Building in the Public Sectors of Developing Countries.Cambridge: Harvard University Press. Chapter 1.

Krueger, Anne O. 1993. Virtuous and Vicious Circles in Economic Development. AEA Papers and Proceedings. 83(2):351-355.


Session # 3

September 26

The Political Economy of Market Reforms

Discussion questions: What are the political trade-offs entailed in implementing and sustaining market reforms? Who are the winners and losers? Are the politics of reform in Latin America different from other regions? If market reforms are good for the poor, why aren?t there more of them?

Geddes.1995. ?The Politics of Economic Liberalization.? Latin American Research Review 30(2): 195-214.

Sturzenegger, Federico, and Mariano Tommasi. 1998. Introduction. The Political Economy of Reform. Cambridge: MIT Press. pp. 1-34.

Bruno and Easterly.1996. ?Inflation?s Children: Tales of Crises that Beget Reforms.? Paper presented to American Economics Association Annual Meetings, January.

Rodrik, Dani. 1996. Understanding Economic Policy and Reform. Journal of Economic Literature. XXXIV:9-41.

Stokes. 1996. ?The Limits of Economic Voting.? Comparative Political Studies 29 (October):.499-516.


Session # 4

October 3

Safety Nets, Adjustment, and Poverty

Discussion questions: Are market reforms bad for the poor? Who wins and who loses during reform? Who gets compensated? What political tradeoffs do governments face when making compensation allocations? Can safety nets enhance countries? competitiveness?

Graham.1994. Safety Nets, Politics, and the Poor: Transitions to Market Economies Washington, D.C.: The Brookings Institution.

Rodrik.1997. ?Sense and Nonsense in the Globalization Debate.? Foreign Policy 107 (Summer).


Session # 5

October 10

Scheming for the Poor: The Political Economy of Pro-Poor Public Expenditures

Discussion questions: How should public expenditures be allocated among the poor and the rich? Why do the wealthy capture so much public expenditure in Latin America? Are targeted or universal expenditures more effective? Which are more politically viable?

Birdsall and James. 1993. ?Efficiency and Equity in Social Spending: How and Why Governments Misbehave.? In Lipton and Van der Gaag (eds), Including the Poor. Washington, D.C.: The World Bank.

Nelson, Joan. 1992. ?Poverty, Equity, and the Politics of Adjustment.? In Haggard and Kaufmann, eds., The Politics of Adjustment: International Constraints, Distributive Conflicts, and the State. Princeton: Princeton University Press.

Graham and Kane.1998. ?Opportunistic Spending or Sustaining Reform: Electoral Trends and Public-Expenditure Patterns in Peru, 1990-1995." Latin American Research Review 33(1).

Skocpol.1991. ?Universal Appeal: Politically Viable Approaches to Combat Poverty.? The Brookings Review 9(Summer).

Pritchett and Gelbach.1997. ?More for the Poor is Less for the Poor: The Politics of Targeting.? Mimeo, The World Bank, Washington, D.C.


Session # 6

October 17

Mid-term Exam – in class


Session # 7

October 24

Reforming Social Security and Other Social Insurance Systems

Discussion questions: Why is social security reform on the national agenda in so many countries? What are the issues in developing countries versus advanced industrial countries? What trade-offs are involved in spending on social security? Are other forms of social insurance equally if not more critical in Latin America?

James.1998. ?Pension Reform: Is There an Efficiency-Equity Trade-off??In Birdsall, Graham and Sabot (eds.), Beyond Tradeoffs: Efficient and Equitable Growth in Latin America. Washington, DC: Brookings Institution and Inter-American Development Bank.

Mesa-Lago.1996. ?Pension Reform in Latin America.? In William Glade, ed., Bigger Economies, Smaller Goverments: Privatization in Latin America. Boulder: Westview Press.

Graham.1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington, D.C.: The Brookings Institution. Sections on social security reform in chapters on Chile, Bolivia, and Peru.

Graham.1997 (February). ?From Safety Nets to Social Policy: Lessons from the Developing Economies for the Transition Economies. ? MacArthur Foundation Program in Transnational Security, Working Paper Series.


Session # 8

October 31

Private Markets in the Social Sectors

Discussion questions: What are the effects of vouchers and school choice in public education systems? Can the private sector do a better job of providing health services? What is the role of the private sector in delivering water, electricity, transport, and other public services? What are the equity tradeoffs involved?

Graham.1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington, D.C.: The Brookings Institution.

Birdsall and Londoño.1998. ?No Trade-off: Efficient Growth via More Equal Human Capital Accumulation? In Birdsall, Graham and Sabot (eds.), Beyond Tradeoffs: Efficient and Equitable Growth in Latin America. Washington, DC: Brookings Institution and Inter-American Development Bank.

Alfaro et al.1998. ?Reforming Public Monopolies: Water Supply.? In Birdsall, Graham and Sabot (eds.), Beyond Tradeoffs: Efficient and Equitable Growth in Latin America. Washington, DC: Brookings Institution and Inter-American Development Bank.


Session # 9

November 7

No class: prepare debate strategies within debate teams, based on pre-arranged discussion topics.


Session # 10

November 14

Private Markets, Public Goods: Class Debate

Paper topics due, along with list of references (from the syllabus) that will form a basis for the papers. Please provide a two or three sentence description of the topic and bring it to class, due today.


Session # 11

November 21

New Ways of Looking at Old Inequities: Mobility and Opportunity

Discussion questions: Why are annual cross-sections limited? How do we measure changes in mobility and opportunity within existing distributions? Have mobility and opportunity changed with market reforms? How do public perceptions of their past and future mobility accord with objective trends? How do those perceptions influence voter support for market policies?

Birdsall and Graham, 1999. “Mobility and Markets: Issues and Policy Choices” in Birdsall and Graham, New Markets, New Opportunities: Economic and Social Mobility in a Changing World (Brookings/Carnegie, 1999).

Isabel Sawhill, “Economic and Social Mobility in the United States” in Birdsall and Graham (1999).

Jere Behrman, “Concepts and Measurement Issues in Latin America and the Caribbean” in Birdsall and Graham (1999).

Gary Fields, “Income Mobility: Meaning, Measurement, and Some Evidence for the Developing World” in Birdsall and Graham (1999).

Behrman, Birdsall, and Szekely, “Intergenerational Mobility in Latin America: Deeper Markets and Better Schools Make a Difference” in Birdsall and Graham (1999)

Graham and Pettinato, “Assessing Hardship, Happiness, and Social Capital: Public Perceptions of Mobility and Opportunity in New Market Economies”, Center on Social and Economic Dynamics Working Paper Series # 5, September 1999.


Session # 12

November 28

Happiness and Hardship: Opportunity, Insecurity, and Perceived Well Being

Carol Graham, “Stemming the Backlash Against Globalization”, Brookings Policy Brief, #78, April 2001 (to be handed out).

Carol Graham and Stefano Pettinato, Hardship and Happiness: Opportunity and Insecurity in New Market Economies (Washington, D.C.: The Brookings Institution Press, 2001).


Session # 13

December 5

Final papers and presentations – in class